Banana Ben Strikes Again

Just when you thought it was safe to hold dollars, even for just a little
while, Fed Chairman Ben Bernanke once again climbed aboard his helicopter and
spread some more confetti (US dollars) across the sky.

Apparently having the world's reserve currency drop 13% since March, even
as measured against a basket of other flawed fiat currencies isn't enough.
And if you were to measure the dollar's performance against hard assets like
copper since March, the currency has lost 50%. Yet despite those facts, Fed
head Bernanke thought it wise to increase the size of the monetary base by
$86 billion just last week alone! That brought the base total to over $1.73
trillion, the highest level since May and just $37 billion off its all time
record high.

Maybe he thought the rally in the stock market was stalling. Or maybe he was
afraid the price of oil was having trouble breaking above $75 a barrel. Either
way, it's just plain disappointing to know that even after he no longer needs
to worry about being nominated to another term, he's still playing politics.

I was fooled myself. I've written recently about an imminent dollar rally
due to the fact that the monetary base had been dropping while bank lending
was negative when measured on a YOY basis. I thought the Fed was worried about
the huge build up of high powered money and had begun its exit strategy.

In the long run it seems the Fed has acquiesced to the plain truth that having
an $11.7 trillion National Debt means that a loose monetary policy is a necessity.
Perhaps it was no coincidence the Fed increased its balance sheet in the same
week it was announced that the deficit would grow by at least $9 trillion over
the next 10 years.

The economic reality is that when a country owes a tremendous debt; it becomes
less burdensome and easier to pay off under an environment where the currency
is losing value. Of course the citizens of that same country become poorer
while they are taxed without their consent through inflation. It is also true
that the holders of that country's debt become victims as well.

Is it any wonder the Chinese are seeking alternatives to the US dollar as
they move their Treasury holdings to the short end of the curve in order to
facilitate an easy exit? For me this is a very tenuous position for the Fed
to hold. The world's reserve currency can't inflate its way to prosperity.
The danger of causing a disorderly decline of the dollar is very high.

So perhaps there will be no rebound from the dollar's decline and maybe there
won't be a well needed correction in the major averages -- at least for now.
Debtors and the wealthy will prosper as savers, creditors and the middle class
continue to go broke.

But no country in the history of planet earth was ever able to sharply devalue
its currency while bringing about a stable economy and fostering real growth.
That's because a strong currency is indicative of a strong country. One that
is providing investors with solid economic growth, positive interest rates,
a current account surplus and low inflation.

The opposite is evident in a country that is plagued with a chronically falling
currency. But eventually a weak dollar will no longer mean the market goes
higher. At some point it will result in not only the end of nominal gains in
the averages but a violent move lower in bond prices as well. And unfortunately,
it will also result in a much lower standard of living for most Americans.

The bottom line is this; a dollar rally and a coincident decrease in the value
of hard assets may still occur in the short term due to their crowed trade
status. But it will not be because the Fed has begun to reduce the money supply.
The longer term trade has to be short the US dollar and long commodities. Precisely
because the Fed has made it abundantly clear that it will rely on an inflationary
monetary policy to help the government pay off its debt.

With more than 16 years of industry experience, Michael Pento acts as chief
economist for Delta Global Advisors and is a contributing writer for GreenFaucet.com.
He is a well-established specialist in the Austrian School of economic theory
and a regular guest on CNBC and other national media outlets. Mr. Pento has
worked on the floor of the N.Y.S.E. as well as serving as vice president of
investments for GunnAllen Financial immediately prior to joining Delta Global.